IT outsourcing contracts are generally complex and detailed documents and should not be signed without careful consideration from both the outsourcing services supplier and the customer. They should be drafted for the specific services being provided and be flexible enough to adapt to the changeable economic climate.
Our 10 top tips for negotiating a successful IT outsourcing contract are:
1. Give yourself time
Manage the expectations of all those involved. Ensure you have time to identify objectives, undertake due diligence and negotiate the contract. By the business investing time to get it right at this early stage, you are likely to be saving significant time and cost in the future by minimising the risk of dispute and litigation.
2. Undertake careful due diligence
As a customer, you should ascertain who is the best supplier for the right price. To achieve this, consider requesting a number of service providers to tender for the work, so you can get a feel for price and timescales.
As a supplier, due diligence is essential and should cover enquiries into the actual extent of the services required, the existing contracts that will transfer and the employees subject to transfer. All of this will then be used to determine price and risk.
3. Sign a contract
It may appear obvious but it is surprising as to the number of companies that commence material services supply without a robust contract in place. Therefore, ensure a contract is negotiated and most importantly signed.
4. Agree a detailed service specification
A clear and detailed description of the services is the lynchpin of any IT outsourcing contract. Minimum service levels to which the services should be produced must also be considered.
As a customer, include contractual provisions for dealing with a supplier’s poor performance. This may include delay payments, service credits, customer rights of step-in and a right to terminate the contract.
As a supplier, you should ensure that you can realistically meet the service specification and ensure you are not liable for any failure to meet service requirements due to the acts or omissions of your customers.
5. Introduce flexibility
IT outsourcing contracts nowadays need to flex with customer requirements and have the scope to increase, decrease and alter the extent of the services on relatively short notice. Contracts need to be adaptable to periods of rapid growth but also periods of consolidation and reduction.
6. Introduce Innovative Pricing Solutions
As a customer, seek complete transparency on all costs and charges. After all, one of the key drivers for outsourcing the work is to make cost savings. Consider including a benchmarking mechanism, under which the supplier’s charges are market tested on an annual basis.
Suppliers should think about introducing innovative pricing solutions to work with the flexibility of the contract. If you have spent time and effort in developing these innovative solutions, ensure they are expressly stated to be subject to the contract’s confidentiality provisions so they are passed on to your competitors.
Both parties may wish to include an index-based price review provision so that there is the ability to adapt to market fluctuations.
7. Ensure data is protected
For the purposes of the Data Protection Act, the supplier is generally the data processor and the customer, remains the data controller. Therefore, the customer remains on the hook for any losses or unauthorised disclosures of personal data by the supplier. As a customer, you will need to manage this risk both contractually and by ensuring that you are comfortable with the security practices of the supplier.
8. Negotiate appropriate liability limitations
Limitation of liability clauses are always a thorny issue as the requirements of the parties are diametrically opposed. As a customer, you need to ensure that the clause covers potential losses if the supplier fails to meet its obligations, whereas as the supplier needs to cap its risk at a level which is commercially acceptable.
As a customer, it is unrealistic to expect the supplier to accept high or unlimited liability for all losses and you should expect the supplier to request that its liability cap be tied closely to the contract price.
9. Consider personnel issues
Consider at an early stage whether TUPE is likely to apply on commencement and/or termination of the contract. Ensure appropriate provisions are included within the contract to protect your position under the legislation whether you are the supplier or the customer
10. Secure an exit plan
Finally, it is prudent for both parties to consider exit plans pre-contract. The plan should address issues, such as the supplier’s obligations during the exit transition period, the customer’s access to the systems and any fees payable to the supplier for its cooperation.